Section 1: Market overview

1.1 What have been the recent bankruptcy and reorganisation
trends or developments in your jurisdiction?

The filing of bankruptcy and rehabilitation proceedings by
corporations in Korea has continued to increase in recent
years. Restructuring and insolvency activity has been
concentrated in the shipping and shipbuilding, steel,
construction, leisure, and second-tier financial sectors.

With the benchmark interest rate being lowered to a record
low by the Bank of Korea, some companies have been able to
avoid restructuring by refinancing their debt. However, the
number of financially distressed companies has continued to
increase, and corporate and household debt levels remain a
concern.

In terms of legislative changes, a recent amendment to the
Corporate Restructuring Promotion Law may result in increased
numbers of restructurings being handled out of court through a
workout process.

1.2 Please review some recent important cases and their
impacts in terms of precedents or shaping current
thinking.

Once one of the top ten shipping companies in the world, the
insolvency of the Hanjin Shipping Co in Korea is a landmark
insolvency case that was unprecedented in its size and breadth
for the Korean shipping industry. After entering rehabilitation
proceedings in September 2016, the rehabilitation court
converted the rehabilitation proceedings into a corporate
bankruptcy after determining that the liquidation value of the
company was projected to be higher than the going concern
value. As a result, all possibility of rehabilitating the
fledging Hanjin Shipping extinguished and the remaining assets
were prepared to be sold for final distribution to its
creditors. The demise of the Hanjin Shipping company was widely
reported throughout the world as a reminder of the struggling
global shipping and shipbuilding industry, with fewer orders to
sustain the viability of all existing players in the
industry.

Another sign of distress in the industry is evident in the
Daewoo Shipbuilding & Marine Engineering (DSME) situation,
where past extensive debt restructuring has failed to
ameliorate DSME's financial struggles. In the most recent
proposed financial rescue package worth roughly $6 billion, the
bank creditors, led by Korea Development Bank and Korea
Export-Import Bank with other creditors, are planning to
discuss the merits of additional cash injections,
debt-to-equity swaps and other techniques that would extend a
further lifeline to DSME.

Section 2: Process and procedures

2.1 What reorganisation and insolvency processes are
typically available for financially troubled debtors in your
jurisdiction?

Under the Debtor Rehabilitation and Bankruptcy Law (DRBL),
there are two main proceedings for the insolvency of business
entities: Chapter 2 rehabilitation proceedings, which are
primarily for the rehabilitation of insolvent business
entities; and Chapter 3 bankruptcy proceedings, which are for
the liquidation of insolvent business entities.

Korea offers another insolvency-related law called the
Corporate Restructuring Promotion Law (CRPL). The workout
proceedings under the CRPL allow for the rescheduling of debts
under out-of-court workout arrangements. The CRPL was recently
amended to cover all creditors with financial claims against
the debtor company, including foreign creditors holding
financial claims and non-financial institutions holding claims
that may be classified as financial claims.

2.2 Is a stay on creditor enforcement action
available?

Yes, though such a stay is not automatic in cases where a
petition is filed with respect to a debtor company for
rehabilitation or bankruptcy proceedings. Following the filing
of the petition and before the commencement of any such
proceedings, the court may grant a specific or comprehensive
stay order. Following the commencement of rehabilitation
proceedings, unsecured and secured rehabilitation claims are
stayed, while common benefit claims are payable when due. Once
bankruptcy proceedings have begun, unsecured creditors are
stayed from enforcement, while secured creditors may enforce
their securities at any time.

In a workout process under the CRPL, the creditors'
committee determines whether to grant a grace period (with
certain limits) for the exercising of claims, including secured
claims.

2.3 How could the reorganisation and/or insolvency
processes available in your jurisdiction be used to implement a
reorganisation plan?

Once the rehabilitation proceedings have begun, the receiver
must prepare a draft rehabilitation plan. A rehabilitation plan
may call for the rescheduling of the debtor's debt over a
period not to exceed, in principle, ten years, except when
corporate debentures are issued under the rehabilitation plan.
Once it has been prepared, the interested parties vote on the
draft rehabilitation plan. The plan must be approved by
unsecured creditors representing two-thirds of the debtor
company's unsecured debt and by secured creditors representing
three-quarters of the debtor company's secured debt. If the
debtor company's total assets exceed its liabilities, a
majority of the debtor company's shareholders must also approve
the rehabilitation plan. If the plan is approved by the
creditors, and if necessary, the shareholders, the plan will be
referred to the court for approval. Any secured rehabilitation
claims and unsecured rehabilitation claims which were not
recognised under the court-approved rehabilitation plan would
be irrevocably extinguished even if the rehabilitation
proceedings were subsequently terminated.

In the case of a workout under the CRPL, the prime bank of a
debtor company may or (upon request by the creditors who
collectively hold more than a quarter of the total amount of
financial claims held by such creditors) must, call a meeting
of the creditors' council by sending out a written notice
regarding the first meeting. The creditors' council may approve
a plan for rehabilitation of the debtor company and enter into
an agreement with the debtor company for implementation of a
rehabilitation plan. For this purpose, the creditors' council
may adopt a debt restructuring plan and/or assistance with new
credit with the approval of: at least three-quarters of the
total amount of claims held by all creditors holding unsecured
financial claims; and at least three-quarters of the total
amount of the secured claims held by all creditors holding
secured financial claims.

2.4 How can a creditor or a class of creditors be crammed
down?

There is no cram-down procedure in the rehabilitation
proceedings per se by which secured creditors can
legally force the junior claim holders (that is, unsecured
creditors and shareholders) to accept the terms of the proposed
rehabilitation plan approved by the secured creditors. However,
if certain creditor groups do not approve the rehabilitation
plan, the court may approve the plan by modifying it to
prescribe additional terms which protect the rights of the
group of creditors that did not vote in favour of the plan

The CRPL does not provide for a cram-down mechanism.
However, the creditors holding financial claims who opposed the
restructuring under the CRPL are authorised to demand that the
creditors' committee buy their claims. If the opposing
creditors do not exercise that demand, they will be bound by
the restructuring plan.

2.5 Is there a process for facilitating the sale of a
distressed debtor's assets or business?

In the case of rehabilitation proceedings, the
court-appointed receiver has the power to dispose of the
debtor's assets as part of the restructuring, though any asset
sales usually require approval of the court. Purchasers who
purchase any assets sold by the receiver generally receive good
title, free and clear of claims. Creditors are generally
permitted to credit bid in such sales subject to the court
approval for the repayment of the creditor's claim outside of
the rehabilitation plan.

In the case of bankruptcy proceedings, the court-appointed
trustee has the power to dispose of the debtor's assets under
the supervision of the court. This is done mainly through
public auction. Purchasers who purchase any assets sold by the
trustee generally receive good title, free and clear of claims.
Creditors are generally permitted to credit bid in these sales.
It is also possible for the trustee to dispose of the asset
through a private contract as long as the process is
transparent and the price is reasonable.

In the case of a workout under the CRPL, the prime bank
submits a plan for the business normalisation of the company
for discussion and approval by the creditors' committee. The
plan may also include sales of assets and other similar
restructuring measures.

2.6 What are the duties of directors of a company in
financial difficulty?

Directors owe a fiduciary duty to their company under the
Commercial Code. If the directors act in contravention of the
requirements of law or the company's articles of incorporation,
or if they neglect to perform their duties, they will be
jointly and severally liable for damages incurred by the
company as a result. A breach of fiduciary duty can also
potentially raise a criminal law issue under Korean law.

If a company is financially distressed and continuing
business without obtaining court protection to an extent that
would only increase the company's losses, in compliance with
their fiduciary duty, the directors can take measures to
protect the company. There is, however, no case precedent to
date where the directors' failure to apply for bankruptcy or
rehabilitation proceedings has actually been deemed to be a
breach of their fiduciary duty to the company.

2.7 How can any of a debtor's transactions be challenged on
insolvency?

Before the onset of formal insolvency proceedings, under
article 406 of the Korean Civil Code, a creditor of a company
may apply to the court for the cancellation and restitution of
any legal act as a fraudulent conveyance if that act is
detrimental to the company's creditors and both the company and
the counterparty of the act had knowledge that the act would be
detrimental to the company's creditors. A transaction is deemed
detrimental to creditors if the company becomes insolvent due
to the relevant transaction, or if the company was already
insolvent at the time of the relevant transaction, or if the
financial condition of the insolvent company worsens due to the
transaction.

Certain transactions entered into by a debtor may also be
challenged after the debtor enters into formal insolvency
proceedings on the grounds that preferential treatment of
certain creditors by a debtor may be a basis for avoidance
under Korean insolvency law.

2.8 What priority claims are there and is protection
available for post-petition credit?

In rehabilitation proceedings, common benefit claims have
priority and are payable when due. They include: new borrowing
that was approved by the court after the commencement of the
proceedings; administration expenses; tax claims which arose
after the commencement of the rehabilitation proceedings;
employee salaries and severance pay; and, disaster and accident
compensation. In workout proceedings under the CRPL, creditors
who hold non-financial claims are not bound by the workout and
can exercise their claims as normal.

If new money is injected after the commencement of
rehabilitation proceedings, any related claim would be regarded
as a common benefit claim payable when due. A new injection can
be secured by the assets of the company, if the company still
has any unencumbered assets. The receiver must obtain advance
court approval for new borrowing or for granting any
security.

In the case of a workout under the CRPL, super-priority is
not necessarily accorded to new loans. Creditors willing to
provide new funding may ask for security, however distressed
companies often do not have many assets left with meaningful
security value. New loans, if extended, are provided by
creditor banks which participate in the out-of-court
restructuring in proportion to their claim amounts.

2.9 Is there a different regime for credit institutions and
investment firms?

No. The treatment of credit institutions and investment
firms depends mainly on the type of their investment (for
example, secured credit, unsecured credit, equity investment,
and so on) and whether it is bound by the relevant proceedings.
However, when preparing a rehabilitation plan, the receiver in
rehabilitation proceedings has discretion to differentiate
between certain subclasses of creditors (for example, unsecured
trade creditors might be treated a bit differently than
unsecured financial creditors, and so on).

SECTION 3: International/cross-border issues

3.1 Can reorganisation or insolvency proceedings be opened
in respect of a foreign debtor?

Bankruptcy proceedings could be commenced with respect to a
foreign debtor if that debtor had assets in Korea.
Theoretically, rehabilitation proceedings might also be
possible if the foreign debtor company had business in Korea.
Further, under the DRBL, it is possible for domestic insolvency
proceedings (either rehabilitation or bankruptcy proceedings)
to be commenced against the debtor separately or in parallel
with the foreign insolvency proceedings recognised in Korea,
under a petition by the debtor, a creditor, or any other
qualified interested party.

3.2 Can recognition and assistance be given to foreign
insolvency or reorganisation proceedings?

Yes. Articles 630 and 631 of the DRBL provide that the
petition for the recognition of foreign insolvency proceedings
can be made by a representative of the foreign insolvency
proceedings. Foreign insolvency proceedings can be recognised
if there is sufficient evidence of those proceedings having
duly taken place, and the recognition of those proceedings
would not have an adverse effect on public order in Korea.

The recognition decision of the court is merely a basis for
subsequently granting relief orders. Therefore, the foreign
insolvency proceedings would affect Korean business and assets
only through relief orders issued by a Korean court upon the
petition by an interested party (including the representative
of the foreign insolvency proceedings) or at its discretion.
The cross-border insolvency receiver appointed by the relief
order of the Korean court will have the exclusive authority and
power to control and dispose of the debtor's business and
assets in Korea (including the transfer of assets to a foreign
country, disposition of assets and distribution), subject to
the approval of the Korean court.

SECTION 4: Other material considerations

4.1 What other major stakeholders could have a material
impact on the outcome of the reorganisation?

The Korean government has been closely monitoring economic
conditions. The Korea Development Bank, a wholly state-owned
policy bank, provides credit to various domestic companies and
often takes the lead in facilitating the normalisation of
larger troubled companies through a private workout process or
the workout process under the CRPL.

SECTION 5: Outlook 2017

5.1 What are your predictions for the next 12 months in the
corporate reorganisation and insolvency space and how do you
expect legal practice to respond?

Specific to the Korean shipping and shipbuilding industry,
2016 was a year of worsening conditions where staple companies
such as Hanjin Shipping and DSME have either entered into
bankruptcy or showed signs of financial distress. We expect
this trend to continue for the next 12 months with other
companies in the same and related industries.

As mentioned above, restructuring and insolvency activity
has been concentrated in the steel, construction, leisure,
shipping and shipbuilding, and second tier financial
sectors.

Among the factors which may have contributed to the elevated
level of insolvencies and restructurings has been the recent
slowdown in economic growth in China, Korea's largest trade
partner, and the devaluation of the Japanese yen, which has
hurt the relative competitiveness of Korean exports. Further,
recent Supreme Court decisions regarding the definition of
ordinary wage, which is used to calculate various
employment-related entitlements, has resulted in a significant
obstacle to the companies' efforts to reduce labour costs.

The Bank of Korea has lowered the benchmark interest rate to
a record low, which may have helped some companies avoid
restructuring by lowering their debt-servicing burden. However,
economic growth has fallen below the longer term trend in
recent years and corporate and household debt levels remain a
concern.

In other market developments, the main purchasers of
non-performing loans (NPLs) in Korea have traditionally
included the United Asset Management Company (Uamco), a
temporary bad bank funded by six domestic banks for purchasing
and managing NPLs, and Korea Asset Management Corporation
(Kamco), a quasi-public corporation established in response to
the effects of the Asian financial crisis of 1997-98, which is
dedicated to purchasing and resolving NPLs from financial
institutions. However, interest in Korean NPLs has been growing
among private investors as the size of the NPL market has
increased. According to the Financial Supervisory Services, the
total value of NPLs extended by banks reached KRW23.2 trillion
($20.3 billion) in the third quarter of 2015, which is almost
equal to the amount for the whole of 2014.

With the increased rehabilitation and bankruptcy activities
in Korea, we expect the legal advice sought in relation to the
court proceedings as well as distressed debt investment to
increase commensurately.

About the
author

Jin Yeong Chung

Jin Yeong Chung leads the firm's cross-border
litigation practice group and the insolvency and
restructuring practice group. He has over 25 years of
experience representing high-profile restructuring and
insolvency matters in Korea. Areas of expertise include
litigation, insolvency and restructuring, finance
disputes, international arbitration and cross-border
litigation, corporate and M&A litigation and
banking and finance litigation.

Chung has served on a number of governmental
committees, including the Mutual Savings Banks
Evaluation Committee, the Commercial Banks Evaluation
Committee, and the Merchant Banks Evaluation Committee.
Since 2001, Chung has also lectured on financial
transactions at the Judicial Research and Training
Institute, the only educational and training
institution which everyone who passes the Korean Bar
Exam has been required to attend before joining the
bench or the Bar. He has authored a number of
Insolvency related articles in industry
publications.